Hyatt Franchising, L.L.C. v. Shen Zhen New World I, LLC

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Easterbrook, Circuit Judge.
• Citation: Hyatt Franchising, L.L.C. v. Shen Zhen New World I, LLC, 876 F.3d 900 (7th Cir. 2017)
• Decision Date: 28 November 2017
• Docket Number: No. 17-2071,17-2071
• Parties: HYATT FRANCHISING, L.L.C., Plaintiff–Appellee, v. SHEN ZHEN NEW WORLD I, LLC, and Shen Zhen New World Investment (USA) Inc., Defendants–Appellants.

876 F.3d 900

HYATT FRANCHISING, L.L.C., Plaintiff–Appellee,

v.SHEN ZHEN NEW WORLD I, LLC, and Shen Zhen New World Investment (USA) Inc., Defendants–Appellants.

No. 17-2071

United States Court of Appeals, Seventh Circuit.

Argued November 7, 2017

Decided November 28, 2017

Norman M. Leon, Attorney, DLA PIPER US LLP, Chicago, IL, for Petitioner–Appellee.

Bruce M. Cohen, Jonah Daniel King, Attorneys, COHEN & LORD, P.C., Los Angeles, CA, for Respondents–Appellants.

Before Easterbrook, Rovner, and Hamilton, Circuit Judges.

Easterbrook, Circuit Judge.

In September 2012 Hyatt and Shen Zhen New World I entered into an agreement providing that Shen Zhen would renovate a hotel in Los Angeles and operate it using Hyatt's business methods and trademarks. Two years later Hyatt declared that Shen Zhen had not kept its promises. An arbitrator concluded that Shen Zhen owes Hyatt about $7.7 million in damages plus about $1.3 million in attorneys' fees and costs. Hyatt filed this suit under the diversity jurisdiction and asked a district court to enforce the award. The court did just that. 2017 WL 1397553 (N.D. Ill. Apr. 19, 2017). Shen Zhen appeals.

Shen Zhen's principal arguments concern the arbitrator's rulings with respect to Lynn Cadwalader, who represented it during the negotiations that led to the contract with Hyatt. Shen Zhen asked the arbitrator to issue a subpoena that would have required Cadwalader to give a deposition; the arbitrator said no. The arbitrator stated that Cadwalader lacked any information bearing on the parties' contractual dispute, which arose two years after she had stopped working for Shen Zhen. The arbitrator also declined to disqualify Hyatt's law firm, DLA Piper, which Cadwalader joined in July 2015, about three years after the contract was signed. Cadwalader had not represented Shen Zhen since October 2012. The arbitrator concluded that DLA Piper's ethics screen ensured that no confidential information would reach the lawyers representing Hyatt in 2015 and 2016.

Shen Zhen maintains that it is entitled to relief under 9 U.S.C. § 10(a)(3), which provides that a judge may set aside an arbitrator's award "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced". Like the district court, we do not see how either branch of Shen Zhen's argument comes within this language.

The statutory phrase "refusing to hear evidence" concerns the conduct of the hearing, not the conduct of discovery. Indeed, nothing in the Federal Arbitration Act requires an arbitrator to allow any discovery. Avoiding the expense of discovery under the Federal Rules of Civil Procedure and their state-law equivalents is among the principal reasons why people agree to arbitrate. That Hyatt's attorneys' fees in the arbitration exceeded $1 million shows that plenty of discovery occurred; an argument that the arbitrator had to allow more rings hollow.

Whether Cadwalader furnished good advice when negotiating the contract might be relevant in a malpractice action against her but does not bear on Hyatt's contention that Shen Zhen broke its promises. The contract has an integration clause that forecloses resort to the negotiating history as an interpretive tool. Shen Zhen tells us that Cadwalader might have helped bolster its contention that the contract is unconscionable, but in a commercial transaction between sophisticated parties the defense of unconscionability, if available at all, is an objective one that depends on the agreement's terms, not on what either side's lawyer may say about the negotiations. See, e.g., Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC , 55 Cal. 4th 223, 246–47, 145 Cal.Rptr.3d 514, 282 P.3d 1217 (2012).

As for the motion to disqualify DLA Piper: a decision by an arbitrator on that subject may or may not be mistaken, either as a matter of fact (is DLA Piper's ethics screen as good as the arbitrator thought?) or as a matter of law (state rules could require disqualification no matter how good the ethics screen), but § 10(a)(3) does not provide for substantive review of an arbitrator's decisions. It provides for judicial intervention when an arbitrator commits "misbehavior", but an error differs in kind from misbehavior. Perhaps Shen Zhen believes that Cadwalader or other lawyers at DLA Piper have engaged in misbehavior, and if so it can complain to the state bar, but the arbitrator is free of any plausible charge of misbehavior—and only misbehavior by the arbitrator comes within the residual clause of § 10(a)(3).

For a fallback argument, Shen Zhen contends that the award disregards federal and state franchise law and therefore should be set aside under 9 U.S.C. § 10(a)(4), which covers situations in which "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." Yet § 10(a)(4) does not make legal errors a ground on which a judge may refuse to enforce an award. See, e.g., George Watts & Son, Inc. v. Tiffany & Co. , 248 F.3d 577 (7th Cir. 2001) ; Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc. , 660 F.3d 281 (7th Cir. 2011). Just as an arbitrator is entitled to interpret the parties' contract without judicial review, so an arbitrator is entitled to interpret the law applied to that contract. An agreement to arbitrate is an agreement to move resolution of the parties' disputes out of the judicial system. An arbitrator is not like a magistrate judge, whose recommendations are subject to plenary judicial review.

Watts and Affymax hold that an arbitrator acts as the parties' joint agent and may do anything the parties themselves may do. Watts , 248 F.3d at 580 ; Affymax , 660 F.3d at 284. If they may reach a compromise over some legal issue without being accused of "violating the law," then the arbitrator may do so on their behalf. That was the situation in Watts , another franchise case in which the arbitral loser accused the arbitrator of misapplying state franchise...